Managing expectations

Zirp has consequences:

’ Ever since the ECB has introduced negative interest rates on its deposit facility, people have been waiting for commercial banks to react. ’

Mises explained what would happen:

’ Since consumption in the present will always be preferred to consumption in the future, Mises notes that if the natural interest rate were to decline to zero, all consumption would stop – we would die of hunger while investing all of our resources in capital goods, i.e., while directing all of our efforts and funds toward production for future consumption.’

Whilst this is impossible, other outcomes are entirely possible:

’ There cannot be any question of abolishing interest by any institutions, laws, and devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”

Sounds like where we’re headed.